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Base erosion and profit shifting – the Irish position

The OECD published a report on base erosion and profits shifting (BEPS) in February 2013. The report identifies six key problem areas contributing to the growth of BEPS internationally. The issues of concern are transfer pricing rules, hybrid instruments, effective antiavoidance, intra-group financial transactions, solutions to counter harmful tax regimes and digital goods and services. To address these areas the report proposes developing an action plan involving the OECD working with international stakeholders gathering further information on the harmful effects of BEPS and proposing solutions. The aim was to have the action plan presented to the OECD Committee on Fiscal Affairs in June. In mid June, at the G8 Summit in Northern Ireland, the G8 released a communique which alluded to the release of a BEPS action plan in July, although there are reports that the action plan will not be concrete.

The Irish government’s response to the draft BEPS report has been positive. The Minister for Finance Michael Noonan is on record noting “Ireland welcomes the report of the OECD and also the coordinated effort at OECD level to deal with the challenges BEPS poses.” The Minister noted that Ireland will work with its international partners on the action plan and the Irish government will be monitoring the progress of the discussions and envisaged solutions. Ireland already has many of the provisions being considered such as a general anti-avoidance rule, domestic provisions limiting tax relief on intra-group debt, transfer pricing provisions and provisions taxing dividends from non-trading foreign subsidiaries at a higher rate of corporation tax than the headline 12.5% rate.

Against the backdrop of BEPS there has been some loose reporting regarding Ireland’s corporate tax regime particularly with respect to the ‘double Irish’ structure and unwarranted negative publicity regarding the use of such tax structuring by US multinationals such as Google and Apple. The response of the Irish government to recent US Senate hearings into the tax affairs of Apple, which referred to the company having negotiated a 2% tax rate with the Irish tax authorities, has been unequivocal. Minister Noonan noted that Ireland would not be the ‘whipping’ boy’ for what he called a flawed US Senate report that said Irish loopholes helped US multi-nationals shrink their tax bills. He noted that the 2% tax rate being mentioned in Congress was misleading and calculated by dividing the tax charged by branches in Ireland by the entire profit of the companies concerned. The Department of Finance has been quick to make clear that Ireland does not do special tax rate deals with companies and Apple has been quick to confirm this.

As to the ‘double Irish’ structure the Department of Finance has said that international tax planning takes advantage of differences in national systems and rules and that the best way to combat such arrangements is for countries to work together at EU and OECD level to examine these structures and consider how international rules can be implemented to ensure fair levels of taxation.

Accusations by US Senators that Ireland acts as a tax haven for multinationals were also strongly rejected. Ireland does not have the characteristics of a tax haven which according to the OECD include a lack of transparency, no or low taxes, lack of effective exchange of information and no requirement of substantial activity. Ireland’s tax system is statute based with a 12.5% corporate tax rate applying to trading profits arising in Ireland and 25% applying to passive income. Ireland has entered into double tax agreements with 69 countries to date, many of which contain information exchange provisions, together with a further 20 (approximately) information exchange agreements with non-double tax treaty countries and most recently entered into an Intergovernmental Agreement with the US for the better implementation of FATCA on 21 December 2012 (one of the first countries to do so). As regards substantial activity, looking at the cases of Google and Apple given their recent exposure in the media, Google employs more than 2,500 while Apple is reported as employing more than 4,000 in Ireland.